By the latest numbers from American Banker, household personal debt in the US has hit an all-time high of $13.5 trillion, with the average debt burden standing at $50,210, just below the record Great Recession numbers of $53,000.
Perhaps most concerning is that while mortgage debt still makes up the lion share of this debt, the growth is spurred by spikes in non-mortgage debt. As American Banker reports:
The sad reality is that Americans are taking on more bad debt, and it could be the canary in the coal mine for another recession.
For many people, debt is a four-letter word. The conventional wisdom is to tell people to stay away from it like the plague. Many financial gurus have built their whole empires on decrying debt and helping getting people out of it.
At Rich Dad, we don’t feel this way about debt. Rather we make an important distinction between two types of debt: good debt and bad debt.
Bad debt is debt that is used to purchase liabilities such as cars, vacations, clothes, and even emergency funds for things you simply don’t have the cash to cover. Why is it called bad debt? Because it doesn’t make you richer. It makes you poorer. This is because liabilities take money out of your pocket each month, not put money in them.
Good debt, on the other hand, is debt that puts money in your pocket each month. It makes you richer. It is used to purchase things like investment real estate, grow your business, or take advantage of other investment opportunities. In short, it is used to purchase cash-flowing assets. The cash flow from those assets pay for the cost of the debt.
Unfortunately, most people in America are saddled with bad debt and have no idea how to put good debt to work for them. And the reality is that before you can put good debt to your advantage, you really need to take care of your bad personal debt.
When my first business failed, I personally had over $1 million in debt that needed to be paid off. Those were hard times for Kim and me. For a short time, we even lived in our car.
Having as much debt as we did, coupled with the emotions of losing my business, it would have been easy to roll over, get a good job, and give up on my dream of building a successful business. I’d be lying if I didn’t say it wasn’t tempting.
Thankfully, we didn’t give into that temptation. Instead we made a plan.
Using all we had learned about money and how it worked, we looked for great opportunities to build our asset column—and eliminate our personal consumer debt—bad debt. By implementing this plan, we were completely debt free within a few years and on our way to financial freedom.
The following are the six simple steps you can use to eliminate your personal debt. If you implement them, they will work.
If you have credit cards with outstanding balances, discipline yourself to use only one or two credit cards. Any new charges must be paid off in full every month. Do not incur any more long-term debt.
Come up with $150 to $200 extra per month. If you have a good financial education and understand how to have money work for you, this should be relatively easy to do. If you can’t generate an additional $150 to $200 per month, then your chances for financial freedom may only be a pipe dream.
Apply the additional $150 to $200 to your monthly payment on only one of your credit cards. You will now pay the minimum payment plus the extra money on that one credit card.
Pay only the minimum amount due on all other credit cards. Often people try to pay a little extra each month on all their cards, but those cards surprisingly never get paid off.
Once the first card is paid off, apply the total amount you were paying each month on that card to your next credit card. You are now paying the minimum amount due on the second card plus the total monthly payment you were paying on your first credit card.
Continue this process with all your credit cards and other consumer-credit debt. With each debt you pay off, apply the full amount you were paying on that debt to the minimum payment of your next debt. As you pay off each debt, the monthly amount you are paying on the next debt will escalate.
Once all your credit cards and other consumer debt are paid off, continue the procedure with your car and house payments. If you follow this procedure, you will be amazed at the shortened amount of time it takes for you to be completely debt-free. Most people can be debt-free within five-to-seven years.
Now that you are completely debt-free, take the monthly amount you were paying on your last debt, and put that money toward investments. Build your asset column, even using good debt.
Contrary to popular belief, debt is not something to be afraid of. Rather, it is a powerful tool to build wealth, when used correctly.
Even when Kim and I were almost $1 million dollars in the hole, we stayed with the preceding six steps and eventually got out of debt. It wasn’t easy, but it was simple. The process required a lot of sacrifice at first, but following the simple six-step outline paved the way for the past two decades of financial freedom.
Now it’s your turn. Get started today on your path to paying off your bad debt and invest in your financial education so that, when ready, you can harness the power of good debt to grow rich.
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